Pricing Interest Rate Options
نویسندگان
چکیده
We price moneyness-based portfolio returns on the LIBOR futures options in an Intertemporal CAPM framework as an extension of the pricing kernel approach. In contrast to existing studies for pricing index options, our results show that only the real interest rate is significant in the pricing kernel for LIBOR options. The polynomial pricing kernel with linear interpretation outperforms the iso-elastic form as a more appropriate functional form. In particular, the 4-term polynomial approximation dominates the 3-term extension in the HJ distance comparison.
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